Presentation on theme: "Regulating Shadow Banking: Challenges And Solutions Marcus Stanley Policy Director Americans for Financial Reform."— Presentation transcript:
Regulating Shadow Banking: Challenges And Solutions Marcus Stanley Policy Director Americans for Financial Reform
Market-mediated banking Banking services: – Maturity, liquidity, and risk transformation. Performed through long, complex credit intermediation chains, not single institutions. Links in chains are often market trades. Transformation relies on supposed ‘safety’. – Guarantees from institutions. – Collateralization. – Subordination.
The Challenges To Regulation The safety net vs. market discipline. Integration of markets and institutions. Complex market-based intermediation chains. Ease of risk transfer and activity migration. – Key question: will bank-centered regulation work?
Shadow Banking And the Safety Net Shadow banking relies on private guarantees. Private safety net is systemically unreliable. Systemic event creates pressure on government to back private guarantees. Private sector expansion of implicit safety net. And even the explicit safety net is unclear. 2007-09 bailout: violated LOLR principles. Can market discipline work?
The Safety Net Post Dodd Frank Deposit Insurance – May be more limited – swaps push out? Federal Reserve 13(3) authority. – Nominally more limited, but in practice? Treasury liquidity line for resolution. Liquidity support for clearinghouses. Exchange stabilization fund, FDIC guarantees. – Clearly better controls here.
Integration of Markets and Institutions Can our fragmented regulatory system handle it? – Glass-Steagal regulation in a new financial world. Market vs. prudential regulators. – Round 1: Money market funds. – Round 2: Asset managers? – Round 3: Wholesale funding markets? Can the FSOC mediate these divisions? Will the Federal Reserve emerge as de facto global regulator?
Complex Market-Based Intermediation Complexity multiplies opportunities for deception of counterparties and regulators. – Limited progress at Office of Financial Research? Leverage can ‘hide’. – Collateral chains, embedded leverage. Market linkages increase fragility. – Procyclicality, link to unstable market prices. – Hard to trace market connections – fire sales.
Will Bank-Centered Regulation Wor k? Banks were central but not only guarantors in the shadow banking system. Ease of risk transfer outside regulated banks. – Basel still permits risk transfer from banks to outside guarantors -- ‘eligible risk guarantors’. – Derivatives markets. Competition from market-mediated banking. Again: market discipline and the safety net.
Solutions That Are ‘On The Table’ Solution #1: Leverage/risk management at major banks and designated SIFIs. Solution #2: Leverage/risk management in funding, risk transfer markets. – Margin, collateral, haircuts, clearing. Solution #3: Activity limitations, but maintain connections between banks and traded markets. Issue #1: Will market discipline + oversight ‘work’ to address migration in response to controls? Issue #2: Hidden leverage and exposures?
Solutions That Are NOT ‘On The Table,’ But Should Be Address complexity bias in regulation. Clearer, more strategic safety net. – Protect key activities, minimize moral hazard. Greater public role in financial system. – Infrastructure and/or services. Restore favored role of banking vs. trading. Change culture of risk transfer – fiduciary. What is finance for?